Joker in the World Economy

If the US is Superman and Batman is China, and both want a growing world economy, their enemy is the Joker super-enhanced with kryptonite, or otherwise known as “Iranian oil”.

Extract from BBC Economics blogger, Stephanie Flanders:

Iranian oil

All the mainstream forecasts for global growth in 2012 assume a flat or falling price of oil. Last year’s updated IMF forecasts, for example, assume the average price of oil falls from around $105 per barrel last year to $100 in 2012 and $95 in 2013.

For the UK, you’ll remember the likely fall in inflation (helped by stable or falling oil prices) was one of my biggest “reasons to be cheerful” in 2012.

US and EU sanctions on Iran could well mess with these hopes, especially if Iran decides to cut oil shipments well before the EU sanctions formally come into force. In the past few weeks, Iran’s leaders – and its parliament – have been talking about doing precisely that.

Iran exported roughly 2.2 million barrels of crude per day in 2010, equivalent to around 2.5% of global demand. A good chunk of that oil went to Europe, unfortunately quite a lot of it to the countries in crisis. Around 15% of the oil imported by Spain, Greece and Italy comes from Iran.

The oil price has crept up in recent weeks, but if you want to insure yourself against a major price spike later in 2012, you can do it very cheaply. The market just doesn’t think it’s very likely.

There are lots of sensible reasons for traders to be relaxed. Saudi Arabia has pledged to increase its production, if necessary, to keep the oil price stable; the US financial sanctions, which would make it very difficult for Iran to get paid for its oil, have quite a lot of flexibility built into them; and the EU sanctions are likely to be phased in.

And yet, this is the oil market we are talking about. And Iran. Neither exactly has a reputation for stability, or predictability.

Senior Israeli politicians at Davos were suggesting privately that there was a one in three chance of some form of violent confrontation with Iran this year.

Of course, Israel has an interest in talking up the threat posed by Iran. But the noises coming out of Tehran are not exactly reassuring. You have to wonder whether the rest of the world – including traders in oil futures – is taking it seriously enough.